Posted on: Wednesday, July 11, 2001
Merrill Lynch analysts banned from buying some stocks
Associated Press
NEW YORK — Merrill Lynch & Co. has become the first major brokerage to ban its analysts from buying stock in companies they research, a move designed to counter growing concern that analysts may be biased in their public assessments of stocks.
The measure addresses one area of concern — the potential for an analyst to have a direct, personal interest in touting a particular stock. Critics of the industry were quick to note, however, it does not deal with the potentially larger problem of influence on analysts from their firms' lucrative investment banking businesses.
"I think it's a baby step in the right direction. The huge inherent conflicts of interest that remain still need to be resolved," said Benjamin Mark Cole, author of "The Pied Pipers of Wall Street: How Analysts Sell You Down the River."
Cole and others said analysts can't be considered objective until brokerages take additional steps, such as eliminating the bonuses that some analysts get for bringing business to their firms' lucrative investment banking operations.
Merrill Lynch, based in New York, said the ban on stock ownership is effective immediately and was designed to "further ensure the objectivity and independence of its research."
The move came several weeks after Wall Street's biggest trade group, the Securities Industry Association, adopted new voluntary guidelines for analysts, such as requiring them to clearly disclose their holdings in companies they cover and prohibiting them from trading against their own recommendations.
Analysts should not have their pay directly linked to the investment banking transactions handled by their firms for companies they cover, the guidelines say.
The Merrill Lynch policy is mandatory for its analysts and more specific than the brokerage industry guidelines, however.
A week ago, a self-policing brokers' group announced financial analysts would be required to disclose potential conflicts of interest when they recommend stocks on television or in other public appearances.
The decision by the National Association of Securities Dealers was made days after federal regulators warned investors not to rely solely on analysts' recommendations.
For some time, the proliferation of financial talking heads touting stocks on the airwaves has prompted regulators to consider requiring analysts who make stock recommendations to disclose whether they or their investment firm could profit from such advice.
Wall Street analysts, who can reach millions of households on TV, can derive credibility and celebrity status from their appearances.
At the same time, some financial analysts work for firms that do investment work for, or own stock in, the companies they cover — and some analysts own the stock themselves.
In addition, analysts' compensation, including bonuses, is sometimes tied to the business they bring their firms from companies they cover.
Some analysts are rewarded when their relationships with companies lead to lucrative fees the brokerages' investment bankers receive for arranging mergers or acquisitions for the same companies, said Cole.
Others are given bonuses for the overall performance of the investment banking units.
